Veris Residential, Inc.

The call over to Mahbub Nia, Ferris Residential's Chief Executive Officer. Mahbub.

Good morning, and welcome to our quarter 2023 earnings call. I'm joined today by our CFO, Amanda Lombard. We had a positive start to 2023, underpinned by continued strength in the performance of our multifamily portfolio and momentum in our strategic transformation. We closed on the sale of Harborside 123, despite an extremely challenging transaction market, particularly for office. Closing the Harborside 123 transaction represents a significant milestone in the company's continued evolution and concludes over $2 billion of non-strategic asset sales since the beginning of 2021, which, combined with a successful development and stabilization of four new multifamily buildings and one acquisition during this period, have transformed Veris Residential from primarily an office company to a pure-play multifamily company, with 99% of our NOI being derived from car-safe multifamily properties. As of March 31st, our 7,681-unit multifamily portfolio, which now includes House 25 and same-store 6,691-unit multifamily portfolios, were 95.9% and 96% occupied, respectively. Following a seasonally slower start to the year, we've seen demand accelerating ahead of what we anticipate will be another busy leasing season. The same-store portfolio achieved a blended net rental growth rate of almost 11% during the first quarter, Moderating is expected, but remaining extremely robust. In particular, our Jersey City important period assets, which represent approximately 72% of the portfolio, continue to outperform with a 13% blended net rental growth rate achieved in the first quarter. Despite the strong rental growth, Class A rents in these sub-markets remain approximately 40% below average comparable Manhattan rents. The broader North Jersey region has become one of the best performing multifamily markets in the country over the last year. driven by robust demand combined with extremely limited new supply, which only accounts for 0.3% of total inventory at the beginning of the year. This sustained revenue growth, coupled with stable controllable expenses compared to the first quarter of 2022, contributed to a 16% growth in same-store NOIs. Since the beginning of the year, we've closed on over $500 million of non-strategic asset sales, releasing approximately $380 million of net proceeds and providing substantial liquidity as we enter the final phase of the company's transformation. In February, we completed our previously announced sale of the Port Imperial Hotel for $97 million, marking our exit from the hotel segment. As previously referenced, earlier this month, we completed the sale of Harbourside 123 for $420 million. Navigating these complex dispositions amidst ongoing market volatility is a true testament to the strength and unwavering commitment of the various residential teams. I'm extremely proud of their hard work and grateful for their tireless efforts in support of our strategic initiatives. Following the sale of Harvestside 123, the company exercised its right to call Rockpoint's preferred interest in the multifamily residential portfolio on April 5th. The following day, as anticipated, Rockpoint exercised its right to defer this purchase for one year. At this time, the company anticipates that such purchase is likely to close late in the second quarter of 2024. Turning to ESG, we continue to execute strategic initiatives at both the corporate and property level, consistent with our ongoing efforts to be a more responsible, sustainable, and inclusive multi-family company. We look forward to sharing this progress in our 2022 ESG report, which will be released later this quarter. As we enter the final phase of our transformation, our focus will be on concluding the few remaining non-strategic asset sales, repaying RockPoint's preferred equity interest, and continuing to work with our board to maximize and unlock the company's intrinsic value on behalf of our shareholders. With that, I'm going to hand it over to Amanda, who will update you on our financial performance during the quarter.

Thanks, Mahbub. For the first quarter of 2023, net loss available to common shareholders was $0.27 per fully diluted share, versus 13 cents per fully diluted share in the first quarter of last year. Before we get into discussing additional details for the quarter, I want to call out that our income statement shows significant variances from the income statement presented in the fourth quarter. This is the result of an accounting reclassification. Harborside 1, 2, and 3, 101 Hudson, and 111 River, as well as the hotels, have been reclassified into discontinued operations for all periods presented. This reclassification was triggered by the sale of Harborside 1, 2, and 3, and further simplified their financial statements. As Maba highlighted, with multifamily now making up 99% of NOI, the reclassification of our historical and current financial statements allows for a greater ease of comparability. In particular, I'd like to call out the year-over-year growth in first quarter gap revenue of $19 million, or nearly 50% from just a year ago. This increase has been driven primarily by organic factors such as portfolio rental growth, the stabilization of House 25, and other newly developed assets, as well as the acquisition of the James. This substantial growth is a testament to our operating platform, the quality of our assets, and the strength and dedication of our team. Core FFO was $0.15 for the first quarter as compared to $0.05 in the fourth quarter. Core FFO was up quarter over quarter due to a variety of factors, including improved multifamily NOI, a reduction in G&A, and an increase in other income. We also have benefited from a reduction in interest expense due to lower average balances on the credit facility, plus the benefit of the caps on House 25 and 145 Broad Street. In February, we announced that House 25 reached stabilized occupancy. And while we currently expect limited concessions being offered for renewals, concessions granted in the lease-up will continue to burn off through straight-line rent during the remainder of 2023. Same-store NOI was up almost 16% as compared to the first quarter of last year due to increased in-place rents across the portfolio, while sequential same-store NOI increased by 8%, driven by higher rents and lower real estate taxes as a result of the one-time catch-up we realized in the fourth quarter. Turning to cost. Controllable and non-controllable property expenses improved, in large part due to seasonal adjustments, as well as, to a lesser extent, the timing of certain activities and our continued efforts to optimize operations. As for our general and administrative costs, after adjustments for one-time severance and certain stock compensation-related adjustments, core G&A was $9.2 million for the first quarter. We anticipate full-year cost savings through 2023 and beyond as we work to further enhance operations, and optimize our cost structure through our ongoing initiative. On to our balance sheet. The $360 million received from the sale of Harborside I, II, and III is held on deposit in anticipation of the repayment of Rock Point's preferred interest, earning interest at a rate of approximately 4.5%. This will be reported as interest and other investment income on the income statement in the second quarter. We ended the quarter with net debt to EBITDA of 10.3 times, down from 18.8 times in Q1 of last year, representing an improvement of approximately 8.5 turns, or 45%, demonstrating a dramatic improvement in our leverage profile during a relatively short period of time. Our debt-to-undepreciated assets ratio also remained stable during the quarter. While we anticipate continued variability in earnings as we seek to conclude our transformation, we remain confident that the downward trend in leverage is sustainable. As we look towards the future and our upcoming maturities, we have only one outstanding maturity this year, which is the $59 million mortgage on one of our stabilized Boston properties. Our debt portfolio remains well positioned, with 97% of our total debt fixed and or hedged with a weighted average maturity of 3.8 years and a weighted average interest rate of 4.4%. Harborside 1, 2, and 3 contributed approximately $7 million of core FFO in the first quarter. However, due to a number of one-time items, run rate is closer to $6 million a quarter. We've previously noted that one of the benefits of the transition from an office-focused portfolio to a pure-play multifamily portfolio is a smoother, more predictable income profile with less onerous CapEx requirement, in particular given our young vintage, average age of six years, high-quality portfolio. You can see this starting to take shape through our Q1 results in which AFFO, which has been historically lower than Core FFO for us, converged with Core FFO at $14.9 million. This compares to the first quarter of 2022, where AFFO was almost $9 million lower than Core FFO. We would like to reaffirm our same-store NOI guidance range of 4% to 6%. While our first quarter results were exceptional and exceeded this range, We are only one-third of the way into the year, and we believe it is prudent to maintain guidance at the current range given the broader economic uncertainty. We will continue to monitor our portfolio and consider revising guidance should we believe it is warranted. In conclusion, we are pleased to report another positive quarter in which we saw continued strength in rental growth, further optimization of our property and corporate level expense structure, and a substantial year-over-year reduction in our net debt to EBITDA. With that, we are ready to open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the star keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from with Evercore SISI. Please go ahead.

Hey, good morning. I'm wondering if you can just talk a little bit about the conservatism you guys have baked into that 4% to 6% NOI in revenue growth figure. I know you just touched on it, but it was such a strong start in the first quarter. I'm just trying to put the pieces together on how to get to that 4% to 6% range and just kind of what your assumptions are, especially in the back half of the year. for kind of where the economy is, assuming you guys keep that 46% range. Thanks.

Good morning. Thank you for the question. Look, I think the 46% is obviously a four-year figure. The fact that we've maintained guidance this quarter comes down to a couple of factors. We're only four months into the year, and there are considerable potential economic headwinds and certainly uncertainty ahead, and so it's really acknowledging that. And then on the expense side, there's a degree of uncertainty as well, particularly on the non-controllable expenses, where we typically see the effect of those come through in the second half of the year. It's been a very strong start to the year. We did seek somewhat temporary expectations, and we expect rental growth to normalize to a more long-term sustainable level. We still feel that will happen. But the reality is, given the strength in the New York metro area and the very limited supply in our market, coupled with extremely high demand for our high quality properties, we're seeing that blended net rental growth still hold up at very robust levels at this time. So it feels a little bit early in the year. We will revisit it again next quarter. Based on first quarter, it is very conceivable that we could be on the upper end of that range, but there's a long way to go.

Great, thanks. That's helpful. And then just one other quick one too. I'm curious, I know you guys sold obviously Harborside 456 this quarter, but I'm curious as well, just kind of some of the interest you're getting at Harborside 5 and 6 and then 23 Main Street. And just given Rock Point exercised the right to defer for one year, does it kind of change your timeline for getting these assets sold or just any commentary on that would be great. Thank you.

Well, yeah, we continue to explore our options for divesting the remaining non-strategic office assets and potentially some further rationalization of the land as well. And I think that is largely independent from the Rock Point redemption timeline. So we'll apply the same approach that we have done historically. We'll divest those in a thoughtful, manner seeking to maximize values, but ultimately with pragmatism in order to conclude this final phase of the transformation.

Great. Thanks. That's all for me. Thank you.

The next question comes from Tom Casselwood with PTID. Please go ahead.

Thank you, and good morning, everybody. Maybe sticking with Rock Point here, and a two-part question. First is, what is their kind of total return kind of holding on for another year? Is it just the 6% dividend, or is it the full kind of 11% with the PIC? And then, are you still in discussions with them? Is there still engagement, or is it the kind of thing where it's like, you know, come back to us in a in a year and we'll get to closing.

Good morning, Tom. Thanks for the question. It's a very relevant one. First part of that question, the only return that is guaranteed to Rock Point during this time period is the 6%. The balance, there'll be a revaluation done and a recalculation of the redemption value accordingly. So the 6% is the only guaranteed part of that. So the second part of your question, your assumption should be that as any prudent management team would, we will seek ways to see if there is some sort of a negotiated settlement that can happen prior to the timeline that's dictated in the joint venture framework. But there are no guarantees that we'll reach agreement, in which case we're bound by the terms of that joint venture agreement.

Got it. Appreciate that, Mahbad. Then on the blended net rental growth rates, you have almost 11% for the quarter. What was the breakdown for that? Sorry if you mentioned it earlier. I just didn't hear it. Between kind of new leases that went out versus renewal leases.

It was pretty even actually, Tom. They were both right around 11.

Got it. And then commercial assets, just some cleanup questions on those. First off, do they sit within that Resi JV as well? And then, you know, kind of what is the plan for those longer term? Do you end up holding those because they end up being complementary to the surrounding residential assets, or could those be things that you look at as non-core longer term as well?

Yeah, I assume you mean the retail and garage income, which, yes, does fit in there and is complementary to that side of the business. So there are no plans to extract that from the joint venture at this time.

Got it. And then just one last quick one for me, if I can. With the kind of gains that I assume are going to be coming in on the Harborside sale and some of the other sales that you've had, are you getting close to the point in time when you're going to trigger the need to reinstitute the dividend just to meet REIT requirements?

Well, based on our projections for this year, we don't anticipate there being a mandatory dividend that would be required. at this time.

Got it. That's it for me. Thanks, everyone.

Next question comes from Joshua Dunderline with Bank of America. Please go ahead.

Hey, guys. Just kind of wanted to discuss your strategy after Rock Point. It seemed like it was kind of a big catalyst. I know it's got delayed a year, but Just kind of what's the focus afterwards? Is it pay down the debt, grow the portfolio, maybe clean up some of the land that was formerly in the JV, encumbered by that? Just kind of curious where your head's at.

Good morning. Well, look, I think that's really ultimately a question for the board and the Strategic Review Committee to to take as and when that event occurs, taking into consideration the publicly traded value of the company at that point. What I would say is we have a board and a strategic review committee that is highly aware of their fiduciary obligations and highly focused on maximization of value on behalf of shareholders. What we've openly said in the past is that as we conclude the transformation of which the repayment of Rock Point and simplification of the capital structure is a critical part, the board's current intention is to run a more formal strategic review process in order to better understand all of the potential opportunities to unlock the substantial value that has been created for our shareholders. That hasn't changed. We're certainly making progress and are nearer to that point with the sale of Harvestside 123, but we have a little bit more work to do. Between now and repayment of RockPoint, our focus as a management team will remain the maximization of entity value through the completion of the strategic plan.

Okay. Okay.

And then just looking ahead to 2024, the House 25 debt comes due. Just kind of curious what your thoughts are on putting permanent debt on that asset.

Yeah, the current plan is to refinance it. It's obviously an extremely high-quality property, very well leased and performing extremely well on the income side. So there's still a good bid for refinancing that asset, and your assumption should be that we would seek to refinance it.

Thank you. Thank you.

Next question comes from Eric Wolf with CD. Please go ahead.

Hey, thanks for taking my questions. I guess just to follow up on the Rock Point redemption, I guess at this point, do you have a sense for what value Rock Point would accept for them to allow you to redeem early? And I guess, you know, before they extended their sort of option to go to May 2024, did they give you a number? that would allow you to redeem right away?

Good morning. I'm not really in a position to be able to disclose any details of private discussions that may or may not be happening with them. As I said earlier, you should assume that we have and will seek to find some sort of a negotiated solution settlement that could happen sooner than the framework that is dictated in the joint venture agreement, but there are no guarantees that that will happen, in which case we are bound by the timeline that is dictated in that joint venture agreement.

Understood. And then you broke out on your NAV page, Arborset 5 and 6, 23 main. Looks like you put it at book value. I guess, should we take from that that This is a reasonably conservative estimate of where the assets would transact, or is that just sort of a placeholder at book value for now?

I would think of it more as just a placeholder. It's not really intended to be a guide on value. We will obviously, as we have done with the $2 billion of office that we've sold over the last decade, two years, seek to maximize proceeds from the sale of those office buildings. But that's really just intended to be a placeholder of Webhook value, so it's not an indication of value.

Got it. And then I guess the last question, we've heard from some of your peers how strong the New York market has been, surprisingly so, through the first quarter. Just curious what you're seeing in terms of market rents and, you know, where lost lease on the portfolio has gone.

Yeah, I think that's absolutely right. You know, we do, as I mentioned in my scripted remarks as well, having younger vintage, very high quality, very well-immune-sized properties right across the river. from Manhattan at a still 40% average discount to rent on that side of the river. And very limited supply is what's really fueling the rental growth that you're seeing. And that is, at this point, still holding up and remains pretty robust.

Got it. But I guess, is there a way to quantify how much upside would be just marking rents to market today?

Yeah, the loss-to-lease in the portfolio, we're capturing it at a pretty rapid rate, as you can see from the vendor's net rental growth. So we're in the kind of 1% to 2% loss-to-lease. Market rents are still continuing to grow from there. So we remain... At this point, we're reiterating the 4% to 6% revenue growth for the year. So take from that what you will. That translates also into 4% to 6% NOI growth. But as I said earlier, based on the first quarter, you'd certainly conclude that we should end the year to the higher end of that range, maybe even exceed that range. But we're only four months into the year, so a long way to go.

Understood. Thanks for your time.

Thank you.

Next question comes from Derek Johnson with Deutsche Bank. Please go ahead.

Hey, everybody. Good morning. You know, I guess attacking that another way, Abad, would be, you know, so far in 2Q, has leasing demand remained resilient for the multifamily portfolio, which is the really only portfolio? And are you seeing really any changes in demand? right now or as the strength in the first quarter continued year to date here in 2Q?

Good morning. That's a good question. The strength has continued. So we are still seeing blended net rental growth rates of double digit. And so the comments I made around the demand for the assets and the extremely limited supply now and for the foreseeable future is still allowing us to be able to push rents at pretty compelling levels.

Okay, thanks. I mean, a lot's been asked already. But just please remind me, I know it's in the SOP, but Harborside, 5, 6, 23 Main Street, these are relatively unencumbered assets, correct?

That's correct. There's no leverage on those assets.

Excellent. When I look at the cash position, $393 million, I believe, net debt to EBITDA 10.3 times, I would think the majority of that cash is going to have to be held in escrow for Rock Point, if I'm correct. And then you did terminate your existing credit facilities, which would leave the coffers probably pretty bare come next year. I'm assuming that you have some pretty high degree of confidence in the disposition of 5, 6, and 23 main where you'd be able to perhaps increase your cash position, of course, outside of generating free cash flow. Where would you poke holes in that? Where would you agree? And what's your cash outlook? And I guess lastly, the net debt to EBITDA 10.3 times, what's the end-of-year goal?

that and I'm sorry for the convoluted question well I think the first point to make is that the business now having 99% of its NOI generated from multifamily and that that business performing extremely well allows us to be able to actually generate certain level of recurring cash flow from the business which We've had a lot of volatility, understandably, given the transformation over the past couple of years, and that hasn't come to an end. But I think we are at a point where we have more visibility than we have done for some time on just the cash flow generation from business. Beyond that, as you correctly said, we still have a substantial amount of equity that is tied in the remaining non-strategic office assets, not to mention still a substantial land bank that could potentially be rationalized to some further degree to unlock valuable equity that could be put to a higher and better use. And thirdly, we being now a much more desirable, from a credit perspective, company to lend to, you should assume, feel confident that beyond the cash flow from operations, beyond cash released from non-strategic asset sales and potentially further rationalization of the bank, we feel confident in our ability to be able to source third-party finance to the extent required as well to plug any potential holes in liquidity needs over the next year or two.

Thank you for that detailed answer, and that's it for me.

Thank you very much.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, everyone, for joining us today. We're pleased to report another very positive quarter of operational performance and look forward to continuing to keep you updated next quarter.

Thank you for attending today's presentation. You may now disconnect.